BUSINESS ORGANIZATIONS OUTLINE

Agents and Employees; An Introduction to the Organization of Business:

Rest Agency: s1 agency is a consensual fiduciary relationship b/t 1

person (agent) who agrees to act on behalf of or under auth of & under

the dir & control of another. (principal)

Agency has highly institututional effects most things in a free mkt

system. We make agent's actions are binding on the principal. We give

the principal the beneit of the rts or prop acquired by its agent.

W/agency we allow principal to broaden the scope of its activities.

Tort law uses agency to eliminate privity as a barrier to recovery. (by

victims)

Vicarious liability: liability w/o fault based upon relationship. Can

be the result of the creation of an agency. Principal can be liable for

torts of her agent.

Apparent auth; inherent agency, etc.

Agent: person who acts, generally.

Principal: one for whom action is taken.

Indep. Contractor: (non-agent or agent)

Agent: Master-Servant relationship

Master-Servant:

Servant: an agent employed by a master to perform service in his affairs

& who's physical conduct is controlled/subject to rt of control by the

master.

***An express K or agreement isn't req'd to create an agency. Agency is

simiply a consensual relationship. The agent agrees to subject to

principal's rt to control.

Tort: whether servant was acting w/in the scope of her employment.

-If servant is, then master will be called to answer by virtue of his

relationship to servant w/o fault.

Partnership: Uniform Partnership Act; an association of 2 or more

persons to carry on as co-owners a business for profit.

Partner is a general partner. (v. limited partners)

*** w/a general partnership, they are exposed in general to unlimited

personal liability.

Limited partnership: ususally liability will not exceed amt of one's

contribution. You generally don't have a voice in the operation of the

business.

-When does a limited partner cross the line of separation? (w/bus

operations)

ie. Corp is gen partner, indivs control operation w/limited

partnerships. Can do that usually.

Indep Contractor:

Non-agent: person who contracts to do something for another & is not

controlled by that other person re: his phys conduct in performance of

the work.

Fowler v. Penn. Tire Co.:

Penn delivered tires to Martin (bankrupt). K appeared to be a

consignment agreement, but actions of the parties appear to be a sales

agreement.

Consignment: after goods are delivered to dealer, no obligation arises

on part of dealer to pay for them.

Trustee in bankruptcy claims they were sold to Martin, so are part of

Bankrupt's assets & can be used to pay off the creditor's.

Look to the actual language of the K, & then also look to the

actions/conduct to determine the intent of the parties.

No segregation of tires, no signs to identify being sold on assignment.

Pro: Referee for Martin/Fowler. Dist Ct for Penn. Ct. App aff'd for

Penn.

Options for selling tires:

1. Sell to Co. owned stores, Mgrs employed by co.

2. Sell to indep. outlets

3. Sale on consignment

If you operate a business, there are a number of ways to operate, each

having diff levels of liability.

Who Bears the Risk????

Adv/Disadv of options:

1. Employee: Co can set prices, Indivs aren't resp for advertising,

Liaility is on employer, Profit goes to employer, etc.

Greater control w/co operated stores. Don't have to rely on indep

operator to sell tires.

Greater risk of loss b/c co borrows money to buy & stock the stores.

Also must invest in training.

Fixed costs, irregardless of how much is sold (salary). Lack of

incentive for emp to maximize profits. (if salary only)

Issues: salary, bonus, type of work to be performed, hrs, duration of

agreement, & terms of employment.

2. If Martin is an indep-Kor Non-agent:

Penn isn't req'd to train, purchase stations, etc. No liab of Penn to

Martin.

Penn incurrs less risk, less costs, etc.

Penn needs a sales force to push to indep dealers, more mkting costs.

May be problems w/quality control. May be lower profits.

Issues are credit ratings of owners of the stores, advertising, quality

standards, requirements for selling goods, image of Co.

If sale on consignment, consignee was legally req'd to return unsold

tires. Diff b/t consignment & sale w/rt of return (old law)

***If sale of consignement, then Martin is an agent, acting on behalf of

Penn. Under a pure classic consignment, Consignor doesn't have

exclusive control over consignee. You can vary it by K. Consignor can

threaten to terminate the relationship.

Who has legal title to the tires?

Depends on:

1. Intent of the parties. Conduct may be conflicting w/intent of the

parties.

Penn believed it owned tires is inconsistent w/finding #9.

Dissent: inconsistent w/consignment.

Exercise of Control re: employees & indep. contractors.

Respondeat Superior: Master is responsible for actions of employee.

Servants & indep contractors

Agent v. Non-agent Indep contractors.

Master-Servant: Servant agrees to work for Master & is subject to

control of Master.

Employee Versus Independent Contractor and The Exercise of Control:

Humble Oil Refining Co. v. Martin:

A servant isn't an indep-contractor. (agents & non-agents) Possible

w/agent indep contractors.

Generally, an indep-Kor agent is when one agrees to act on behalf of a

principal & the principal will not likely have control over the physical

act, but will have control over the result.

Facts: Love dropped off her car at Humble station operated by

Schneider. The car rolled away, striking & injuring the Martin's. The

car had been left in control of the station for repairs. Rolled by

virtue of gravity b/c hand E-Brake wasn't set.

Focus is on actual authority.

Humble says not liable b/c:

1. Schneider was an indep Kor Non-Agent

Schneider & Humble had an agreement whereby Humble paid a substantial

portion of the utilities & controlled the store hrs.

Humble has the rt to control the sale of gasoline.

Schneider is an indep-nonagent w/re: service.

Held: Schneider is a servant of Humble & Humble is liable for

Schneider. Master is a principal who hires an agent to perform services

& conduct affairs & controls/rt to control final product.

An indep-Agent you have some rt of control.

1. Indep Kor: does not act on hehalf of other party. The other party

does not have rt to control hysical conduct.

2. Indep Kor-Agent: acts on behalf of, but not subject to control of

how it's accomplished.

3. Indep Kor-Servant:

Agency: if you are an agent, you generally act on behalf of another &

the other has a rt to control how you act....Makes Indep Kor-agent

definition above make no sense.

Humble Oil: an indep Kor or a servant.

Can have a statement saying they're an indep Kor, but ct may determine

that that person is a servant.

Must determine whether there are indicia of control. Also must

determine whether acting for, but not subject to control of.

Definition of agent & non-agent type independent contractor.

HOOVER V. SUN OIL:

Smilyk apparently dropped his cigarette which started the fire which is

the core of this action. Sun Oil, Barone (operator), & Smilyk were the

D's.

Sun Oil moves for summ J, claiming Barone is an indep Kor & not an

agent, so no vicarious liability. P's contend that Barone was acting as

Sun's agent. P's should contend that Barone is a servant b/c would

expose Sun Oil to maximum liability.

Pro: Ct determines that Sun is not a Master & Barone isn't a servant.

Held: Sun had no rt to control Barone, Landlord-Tenant relationship

only. No control & no implied liability.

Sun had no day-to-day control over Barone's operation of the station.

Barone bears the risk & gets the profit.

MURPHY V. HOLIDAY INNS, INC:

Franchisor: controls the distribution of his goods and/or services

through a K which regulates the activities of the franchisee, in order

to achieve standardization.

Franchisee: enjoys the rt to profit & runs the risk of loss.

P slipped & fell on water drainage from an air conditioner on the

premisies & was injured. The hotel was owned by Betsy-Len, a licensee

of Holiday Inn.

P claims that there is actual agency b/c there exists a Master -Servant

Relationship.

Actual Agency: a consensual relationship, agency is the fiduciary

relation from the manifestation of consent by one person to another,

whereby the other shall act on his behalf & subject to his control, &

consent by the other so to act. Rest 2d Agency s.1

The fact than an agreement is a franchise K doesn't insulate the King

parties from an agency relationship.. If a franchise K so regulates the

activities of the franchisee as to vest the franchisor w/control w/in

the definition of agency, the agency relationship arises even though the

parties expressly deny it.

Consent, Control, & acting under are necc to establish an agency

relationship.

Control and The Liability of Creditors:

GAY JENSON FARMS CO. V. CARGILL, INC:

P's were 86 farmers who sold grain to Warren, an agent of Cargill, who

became bankrupt & never paid the P's.

Warren owed Cargill $3.6 million & the P's $2 million.

Issue: Whether Cargill was liable as principal on K's made by Warren

w/P's. Whether Warren was acting as an agent of Cargill.

Cargill is liable b/c of its control over Warren.

-Rest Agency s1: A creditor who assumes control of his debtor's

business may become liable as a principal for the acts of the debtor in

connection w/the business.

The point at which the creditor becomes a pricipal is that at which he

assumes de facto control over the conduct of his debtor, whatever the

terms of the formal K w/his debtor may be.

Buyer/Supplier relationship OR Principal/Agent???

Agent: one who contracts to acquire property froma 3rd person & convey

it to another is the agent of the other only if it is agreed that he is

to act primarily for the benefit of the other & not for himself.

Supplier: is to receive a fixed price for the property irrespective of

the price paid by him. He acts in his own name & receives the title to

property which he thereafter is to transfer. He has an independent

business in buying & selling similar property.

Where a creditor exercises veto power over imp. decisions, coerces

debtor to put in cntrol a person designated by creditor, & where

creditor provides assurance to other creditors of assurance, then that

Creditor is at increased risk of being classified as a principal &

exposed to liabilities.

Actual/Express Agency

Actual/Implied Authority

Apparent Authority

Ratification

Inherent Agency Power.

In general, if an indiv is acting under ambit of actual-express

authority, then a 3rd pty can enforce the K b/t principal & agent even

when the 3rd pty doesn't know that the agent was acting on behalf of the

principal. [principal is liable]

Actual Express Auth: agent isn't acting contrary to her mandate.

Actual Implied Auth: arises from custom, usage, & conduct. Assume orig

actual/express auth, Can the principal think of everything necc to

accomplish the task? Have agency w/actual-express. Agent may need to

take steps to carry out requests of the principal. Agent undertakes

incidental tasks to accomplish her mandate.

Apparent Auth: ask whether there has been comm b/t principal & 3rd pty.

Comm need not be explicit. Based on holding someone out as the agent,

as having authority, which agent may not necc possess. Must ask whether

agent is held out to the public by the principal.

Ratification: when principal decides to adopt a K, negotiated by an

unauthorized person purporting to act as an auth person/agent.

Inherent Agent: principal should pay for torts of their agents.

Respondeat Superior. Hold the principal responsible for some of the

acts of their agents, which weren't auth, but nevertheless close

to/incidental to acts which were authorized. In general, as a predicate

to inherent agency, it is req'd that there must be an existing agency.

3rd pty has a reas belief that the agent has the auth which he

exercises. Generally don't have any holding out by the principal,

principal is either undisclosed/partly disclosed. Principal is

responsible for unauthorized acts incidental to the agent's actual

powers.

The Scope of Authority; Apparent Authority:

LIND V. SCHENLEY INDUSTRIES, INC. [Apparent Authority]:

P worked for Park, who later merged into Schenley (D).

P originally worked for Herrfeldt, who later told him that he'd been

promoted & was to now report to Kaufman.

Lind contends Kaufman told him he'd get his regular salary plus a 1%

commission on the sales of the people under him.

Pro: Jury found for Lind, then the judge issued a jnov. App Ct rev'd &

remanded back to trial ct to reinstate the J for Lind

Apparent Auth: principal acts in such a manner as to convey the

impression to a 3rd pty that an agent has certain powers thich he

may/may not actually possess.

1% would quadruple the salary of Lind's supervisor, Kaufman. May be

unreas for Lind to believe that he was offered that salary.

Three-Seventy Leasing Corporation v. Ampex Corp:

Joyce owned 370 Leasing Corp, Kays was his salesman.

Cost of memory units was 100,000 each & w/a down payment of 150,000.

Nov 17,1972 Kays sent Joyce a confirmatory memo for the delivery dates

for the memory units.

An agent has apparent authority sufficient to bind the principal when

the principal acts in such a manner as would lead a res. prudent person

to suppose that hte agent had the auth he purported to exercise.

Muller agreed that all communications were to be channeled thru Kays to

Joyce

Neither Mueller nor Kays has the auth to bind Joyce in this case.

Ampex should indicate that all negotiations are subject to the approval

of the K manager.

Joyce should have inquired as to who had the auth to make a binding K.

A resolution from the board of directors of the firm, issued by the Firm

Secretary should be issued/requested by Joyce to assure who has the auth

to form a binding K.

Indicators of Apparent Authority:

-a holding out to the public that the person is an agent

-Kays was held out that he had authority, indicia of app. authority

Quest: Whether person was held out as having apparent authority.

Billops v. Magness Construction Co.:

P's entered K to rent a ballroom at the franchisee's hotel.

Day of the banquet, director of the ballroom requested additional money

(extortion) & P's refused. Director continued to ruin the entire

affair.

This ct finds evidence of actual & apparent authority.

Actual Authority: principal expressly/implicitly grants to an agent when

the "or" controls "ee"/rt to control the "ee"'s business.

Franchisor here had a lot of control & the franchisee had little

discretion w/the operation of the hotel.

Apparent Authority: a holding out & reasonable reliance that originated

by the principal.

Co. sells out/advertises for a group of hotels. Hotels are indep. owned

& operated. The Franchcisor/Franchisee/all to become insolvent. How do

the Hotels protect themselves?

How do the other hotels protect themselves from injuries occurring at

other indep operated hotels w/the same name?

-Disclaimers will not work in the K b/c the law won't allow it.

-Signs indicating Owned & Operated by & Indep ownership & operation of

each hotel.

-Must reduce indicia of control.

***You can't prevent all liability on a guarenteed basis.

Inherent Agency Power:

Watteau v. Fenwick: [Inherent Agency]:

Humble was D's Mgr, license was always taken out in Humble's name. D's

were Watteau.

P was Fenwick who supplied the cigars.

Humble only had auth to buy bottled waters & mineral water.

Goods were req'd to be supplied by D's

We have an undisclosed principal

Holding one out as an agent requires:

Difficult to hold out if one doesn't know who the principal is.

-If the agent is empowered to carry on business w/the public, & the

agent does so, then that may constitute a holding out after the

principal is disclosed.

Must Prove (w/o holding out):

1. Agency in fact existed

***Where anyone has been held out as an agent by the principal, then

there is a K w/principal by Estoppel. The principal is resp for agent,

even if undisclosed, b/c they hired the indiv & b/c the agent is acting

for & at the benefit of the Principal.

***Reqt's of Agency [for exam purposes]

1. consensual relationship

2. agent is under control of the principal

3. agent acts on behalf of the principal

Rest 2d Agency s.

***Inherent Agency:

1. Must be an existing general agency

2. An act w/in the scope of auth/within scope of typical agent

relationships

3. An unauthorized act of the agent

(No holding out by the principal is req'd)

4. Reas belief by 3rd person must exist that the agent has the

auth.which she exercises

even if 3rd pty is unaware of the existence of the agency itself (or

principal)

Kidd v. Thomas A. Edison, Inc.:

Fuller was hired by TAE,Inc. to K singers for "tone tests" recitals.

-singers were going around the U.S. promoting records

Fuller was to learn what the artists wanted re: fees expected

Fuller was to tell the artists that TAE, Inc would pay for the fees, or

insure the payment.

Fuller was to make the K's & then bring them to Maxwell for approval.

Maxwell was Fuller's supervisor & Maxwell had to ultimately report to

Edison.

P,Kidd, alleges that the K was an unconditional engagement for a singing

tour. She is most likely alleging a breach of K.

This case should have been argued under inherent agency. (some

disclosure of the principal, so it can't be apparent agency/shouldn't

be.

Rest 2nd Agency s3

HYPO: Principal says not to hire Tom to operate the camera. Principal

then pays off the Agent & Agent leaves Tom. Can Tom sue Principal &

prevail? & if so, under what theory?

Tom may win against the Principal under the theory of inherent agency

b/c the agent in this case would usually hire him to operate the camera,

so Tom could reas. believe that the agent had the power to do so.

Agent was never held out as having a power that she didn't possess.

Fiduciary Obligation: Agent's duty to the Principal

1. To act w/reas care & skill for the purposes of the agency

2. To disclose all relevant info to the principal

3. Keep & render accts

4. To act only as authorized

5. To act in good faith & loyalty

Fiduciary Obligation:

General Automotive Manufacturing Co. v. Singer:

Singer, D, is a machinist consultant & Mfr's rep. D was also a general

manager & was to receive a fixed monthly salary together w/a sum equal

to 3% of the gross sales of the P.

-P was to devote entire time, skill, labor, & attentionto employment &

was to work for 51/2 days.

Singer made a profit for himself while employed by GAM.

-failed to disclose info to employer.

Disgorgement:

Ct deprives D & others in his position from engaging in other

bus/incentive to not report to your employer such information.

Possible breach of employment K.

-less to recover b/c based on hrs lost & not actual damages.

Bancroft-Whitney Company v. Glen:

Glen was President & director of the co. He had fiduciary obligations

to the co & possibly the shareholders.

Lawyer's Co-op owned the P/Company & Gosnell was the President.

Bender was the head of Bender Co & Glen accepted an offer of employment

by Bender, & brought many associates w/him to the company.

Glen failed to disclose information to P co. when he had a fiduciary

duty to do so, never informed them of the raid, used info to attract

employees when making the offers, assisted in solicitation of employees

of P to Bender.

Issue: Whether Glen violated his fiduciary duty b/c of the above-

mentioned conduct & therefore those who hire, guilty of unfair

competition?

Could give rise to tortious interference w/contract

Corporate officers & directors aren't permitted to use their position of

trust & confidence to further their private interests. They stand in a

fiduciary relation to the corporation & its stockholders Rule demands

of a corp officer/director, peremptorily & inexorably, the most

scrupulous ovservance of his duty, to protect the interests of the

corporation committed to his charge, to refrain from doing anything that

would work injury to the corp, or to deprive it of profit/adv which his

skill & ability might properly bring to it, or to enable it to make in

the reas & lawful exercise of its powers.

An officer must exercise his powers in good faith w/a view to the

interest of the corp.

Duty of loyalty & care, to corporation & shareholders.

Town & Country House & Home Service, Inc. v. Newberry:

Cleaning business, employees left & took a lot of their ex-exployer's

customers

Issue: Whether the employee's owed a duty of loyalty?

Even where a solicitor of business doesn't fraudulently operate under

former emplyer, he acan't solicit employer's curtomers who aren't openly

engaged in business in advertised locations or whose available as

patrons can't be easily ascertained & whose business waas secured from

yrs of bus. effort, advertising, time& money, etc.

If you're making a general solicitation, then you're not using

confidential information

Ct: former employees lose & the Employer wins (Town & Country)

Agency is a consensual relation, no express agreement to form. Somewhat

of a fiduciary relationship b/t the agent & principal. Agent works for

& under the control of the principal.

Indep Contractor Agents & Non-Agents OR Indep Contractor v. Servant.

Indep Contractor doesn't work on behalf of or under the control of

another.

Indep contractor Non-Agent: works at arms length for another

Indep Contractor Agent: not under control of the other, but does act on

behalf of another.

Indep Contractor Agreement: ct characterized the indep contractor as a

servant. Whether principal had the rt to control. If servant, acts on

behalf of the principal.

Partnerships:

Partnership: an association of 2 or more persons to carry on as co-wners

a business for profit.

Advantages & Disadv of Partnerships & Coporations:

1. Current tax system: tax partnership income only once (v. corp

income-taxed twice)

-Corps: Calc profit & loss & tax net profit

-Corps: Indivs pay indiv tax on same profit (shareholder)...Double

Taxation.

2. Gains & Losses go to the Partners & claim the gain/loss indiv. tax

return

3. Sub. 'S' corporations: smaller corps, under such status won't pay

taxes, but instead shareholders claim corp income on indiv tax returns,

very much like partnerships.

Life v. Unlimited Life:

1. A corporation has unlimited life, can remain for an indefinite time

2. A partnership has a limited life b/c if one partner leaves/dies, then

the partnership is dissolved.

Liability:

Corporations can limit their liability.

-Limited to amt of investment.

Partnerships, exposed to unlimited, personal, liability.

Partnerships; Partners Compared w/Employees:

Fenwick v. Unemployment Compensation Commission:

Beauty supply shop. Ct is trying to determine whether Fenwick should

have to pay unemployment comp under NJSA ß 4:21-1. [If she's a partner,

then he doesn't have to pay.]

Although a partnership K was agreed upon, she was lacking many of the 5

elements req'd for a partnership to exist.

He who alleges a partnership has the burden of proving the partnership.

Frank v. R.A. Pickens & Son Company:

Parties involved: -RA Pickens & Son (owners of the land)

-RA Pickens & Son Company (lease from above)

In general, the private agreement of the ptys occupies the highest

degree of priority.

Frank is looking for his accounting & liquidation of a partnership share

in the co.

Frank was a partner in the RA Pickens & Son.

After termination w/co., a ck for $35,805.97, which Frank refused.

Initial purchase of his partnership was based upon the book value:

***-Book Value: an amt on the books of a firm, reflecting the or cost

of assets, less depreciation . (an allowance for decline on value of an

asset by virtue of the passage of time & wear & tear), plus profits that

haven't been distributed to the partners. Can be misleading. FOR EXAM

PURPOSES

-Mkt value & book value can e substantially different.

In mkt-oriented society, good pub policy reas to allow indiv K to

override UPA Code.

Legislature won't necc include/foresee all problems. Need to

allow/utilize flexibility when applying the code.

Frank was more likely an employee w/a profit share.

-if he is a partner, then he is an agent.

Ct determined that the UPA wasn't applicable, but that he was a partner,

but the rules for termination of his partnership interest were pursuant

to that agreement by the ptys.

If Mr. Frank is an employee of the Co & the President of Son, then he

would have a conflict of interest b/t fiduciary duties to Co & fiduciary

duties of Son.

Partners Compared w/Lenders:

Martin v. Payton:

KNK is a firm/partnership. They were in fin. trouble & Hall, the had of

it, had friends who would invest w/a loan.

The other three (who gave them a loan for 2.5Mil)

The return of the loan was 40% of profits w/a min & max amt to be

earned.

Hall operated KNK partnership, and also achieved resignation of all the

KNK partners.

KNK lost a lot of money by dealing w/a foreign exchange speculative

investments.

-dealing w/exchange rates, speculate & give advice to others, &

offered Xamt US v. Xamt in another currency. They speculated poorly on

values of the currencies.

KNK theorizes that the creditors became partners in the firm, doing

banking & brokerage. P was a creditor of firm, claimed D's made

investments, were partners, & were liable for the firms debts as such.

How do we distinguish b/t this & the Cargill case?

-In Cargill, Cargill was an agent of Warren, but not necc a partner.

Principal was exposed to liability.

-In Martin, funds were given, but Payton, etc, were not partners, only

creditors to the company.

-Argue that Payden didn't control Hall & weren't at same level/weren't

w/same level of mechanisms for controlling operations, etc as in

Cargill.

The Fiduciary Obligations of Partners:

Mainhard v. Salmon:

Lessor, Gerry & lessee, Salmon, entered a K to lease a Hotel which was

to be used as shops & offices.

Meinhard fronted money & in return was to receive 40% of the net profits

for the 1st 5yrs & 50% of the net profits for the remaining 15yrs.

Claim is Salmon breached fiduciary duties to Meinhard by entering a new

K for the same prop w/o consulting Meinhard.

Issue: Whether this is a joint venture & Whether this is a partnership

& Whether the fiduciary obligations are the same or diff from regular

partnerships.

-This is a joint venture/Co-adventure

Joint Venture: has a limited duration & a limited scope

Partnership: doesn't generally have a limited scope & the duration is

generally only limited by the lives of the ptys.

***Dissent by Andrews. W/in scope of joint enterprise, a fiduciary

obligation to all that relates to that venture. Fiduciary obligations

don't extend to the new entity.

***Correct rules re: partnerships made by Cardozo.

p.100 Duty of Loyalty by joint adventurers & partnerships.

-W/Partnerships: duty to disclose new opportunities & businesses.

Ct: P gets 50% less 1 share in the equity

Meehan v. Shaughnessy:

Meehan & Boyle were partners in D's law firm, Parker, Coulter, Daley, &

White.

P's contacted clients & sent letters, requesting to take their bus.

w/them & sent authorization forms.

P's also approached Cohen re: establishing the new firm.

P's also recruited Black & Fitzgeral in joining the new firm.

P's breached their fiduciary duties to the D's as partners.

***Not the last word on the issue of contacting clients b/f leaving.

***Obligations of partners can be varied by K (fiduciary obligations)

Would need disclosure b/c of potential breach of loyalty & duty to

disclose.

If Norma sued Mark, then the remedy would be disgorgement.

Bassan v. Investment Exchange Corp.:

Investment was Gen Partner in Auburn West

Auburn West was a Real Estate Investment Trust

Action was brought for an accounting & dissolution of the partnership

Issue: Whether partners consented to profits derived by Investment (Gen

Partner)?

No Agreement re: profits to be rec'd by IEC in selling prop to the

partnership.

Ct: no consent by the limited partners & IEC should be liable for

profits realized from the sale of the prop.

The Rights of Partners In Management:

National Biscuit Company v. Stroud:

Stroud told NBC that he wouldn't be personally liable for the sale of

bread to the partnership.

If 2 partners, need unanimous agreement b/t partners to be binding

Bread was delivered for $171.04, ordered by Freedman, after Stroud

declared he wouldn't be liable.

Partners are jointly & severally liable for the acts & obligations of

the partnership.

NBC prevails in this case.

Problem:

-Unpleasantness is generally insufficient for dissolution of a

partnership.

-Gen.View: A & B run real risk that terminating Don v. C's orders may

violate the Partnership agreement.

-What if A & B make an anti-nepotism rule & C hires D against the rule.

If grandfather clause, then not necc. a problem.

Day v. Sidley & Austin:

Law firm merges w/another firm.

P occupied chair on committee, and later was assigned a co-chair & his

offices were moved.

P seeks damages for loss of income, damage to professional reputation, &

personal embarrassment resulting from his forced resignation.

D's Summ J was granted b/c failure to state a claim upon which relief

could be granted.

The Executive Committee led the negotiations for the merger.

P had no rt to approve/disapprove & stop movement to new offices, so his

veto of the move is irrelevant.

No diminution of status b/c no rt to remain chair. (b/f or after merger)

Merger: fundamental change in a partnership & generally requires some

form of agreement.

-Agreement among the ptys.

Partners at Loggerheads: The Dissolution Solution:

Owen v. Cohen:

Owen & Cohen are the partners. Bowling Alley was orig operated at a

profit, later declining. Purpose of entity was to make a profit.

Owen was to paid back initial outlay of $$ out of the partnership

profits in addition to his salary.

Upon dissolution the partnership owed the loan to Owen.

ß2: Dissolution of a partnership is the change in the relation of the

partners caused by any partner ceasing to be associated in the carrying

on a distinguished from the winding up a the business.

ß3: On dissolution the partnership is not terminated, but continues

until the winding up of partnership affairs is completed.

Owens claims they can't carry on b/c of disagreements

Ct: dissolved partnership b/c serious disagreements that prevented the

partnership from carrying out.

UPA ß32, judicial dissolution is a more equitable remedy/situation.

ß4: After dissolution, rules for distribution, can derogate from rules

by agreement. (b)

Capital: generally orig capital investments in the company.

Collins v. Lewis: (I got called on for this case)

Cafeteria partnership. Collins was the investor & Lewis was to

construct, manage & operate.

Dispute over extra $$ beyond estimations.

Ct. held Lewis held up to his part of the bargain & Collins was in

breach.

Ct. refused to grant a decree of dissolution.

Monin v. Monin:

2 Brothers entered into a milk delivering partnership. Business began

to deteriorate & they dissolved the partnership.

Sonny applied for a DI K b/f actual dissolution & asked to be granted

the license from them to deliver milk from the time of dissolution.

Private auction resulted w/Charles getting the equip, etc.

Damages were awarded $64,000 [86,000-22,000(equip)=64 milk license]

Sonny breached/violated his fiduciary duties. Possible breach of K b/c

of the covenant not to compete.

Pav-Saver Corp. v. Vasso Corp:

PSC (Dale) & new Partnership w/Meersman is (Pav-Saver Co.), later to be

known as Vasso.

Dale turned over the trademark & patents to the new partnership. He also

allowed Meersman to draft the agreement, later approved by an attny of

PSC (& Pres).

Should have charged a license fee so that it is obvious that the patent

was still controlled by Dale.

ß38 UPAsupp.

Dale wrongfully dissolved the partnership & violated the agreement.

Difficult/impossible to continue to run the business w/o the patents &

trademarks.

Ct held for Vasso, he keeps the patents, trademark, & the liquidated

damages as specified in the partnership agreement.

-Dale gets a portion of the value of the partnership.

Liquidated damages aren't a penalty in this case in the view of the

court.

Good Will: intangible assets, can't be measured objectively/technically.

Limited Partnerships: generally run by a general partner. Limited

partners don't control the operation of the partnerships, & if they do

so, then they expose themselves to liability. Rely on the expertise of

a general partner. Very common in the real estate commodity. One of

the dangers is the risk of being made a general partner. (from

exercising control in the business)

Limited Liability Companies (): provide for limited liability & various

other corporate characteristics, however they retain sufficient

partnership characteristics so that they are classified as partnerships

for tax purposes.

-useful for firms that can't qualify as "S" corporations. "S"

Corporations have pass-thru taxation. Income earned by the corp accrues

to the indivs who own the S corp. Generally a "C" corporation, the

income of the firm is taxed as a corp & then the dividends rec'd by

shareholders is taxable.

-Limited liability, but partnership taxation methods.

***Authors of casebook that such limited liability companies will become

dominate form of business in the US.

Limited Partnerships:

Holzman v. De Escamilla:

Limited partnership which ran the farms. Gen. partner De Escamilla.

Russell & Andrews were limited partners.

Went bankrupt. Trustee brought action to determine whether Russell &

Andrews lost their limited partner status & have become the equivalent

of general partners.

Evidence revealed that R&A had some control over crops to be planted,

had control over check writing authority, & they required the Gen.

Partner to resign & replaced him w/a new manager.

-they managed the business.

Ct. found that all 3 were liable as general partners.

***Limited partners not to be liable as a general partner, unless, in

addition to exercise of rts & powers as limited partners, he takes part

in control of business.

The Nature of the Corporation; Promoters and the Corporate Entity:

Hypos:

1. If he lies, could be misrepresentation.

-Barrett still liable even after, under the doctrine of Corp. by

Estoppel.

Southern wins b/c they are a Corporation by Estoppel:

-could be argued that it is a de facto corporation.

Questions:

1. Can a corp be a pty to action?

-Corps can unilaterally agree to be held liable.

2. Can the initial agent/promoter avoid liability, absent an agreement

to the contrary, an agent for a not yet formed corp, an agent is liable

on the K. For the agent to escape liability, after the formation of

corp, the agent must obtain agreement of the other corp.

3. Who is liable if corp not ever formed?

-Absent an agreement to contrary, the agent is.

4. Are putative shareholders personally liable?

-They aren't, if the corp isn't a de jure corp.

5. A de facto corp is a firm not properly incorporated. It arises when

the organizers:

a. try to incorporate in good faith.

b. they have the legal rt to do so.

c. they acted as if the corp had been formed under these conditions,

cts may treat firm as de facto corp & impose limited liability.

6. A ct. will also treat a firm that wasn't properly incorporated as if

it were a corp, if the persons dealing w/firm:

a. thought the entity was a corp all along, and

b. they would earn a windfall, if not allowed to argue the firm is not

a corp.

The Corporate Entity and Limited Liability:

Walkovszky v. Carlton:

Escaping personal liability by incorporating.

Piercing Corp. Veil:

1. Alter Ego

2. Unity of Interest

3. Fraud.

Enterprise Liability:

-Reverse Piercing: related, but distinguishable

Dismissal is supported

Inadequate insurance is NOT enough to pierce.

Held: Complaint falls short of adequately stating a c/a against the D in

his indiv. capacity.

They allow an amended complaint, so there could be some type of c/a.

We don't allow agency to be used as a theory b/c we would eviscerate

limited corp. liab. if we allowed personal liab. every time.

When do avoid personal liab. in a corp context?

-observe corp rules

You can incorporate in any of the 51 juris

-better rules

-large # opinions in Delaware cts.

Victoria Elevator Co. of Minneapolis v. Meriden Grain Co., Inc.:

The ct assumes that there was no "showing that the P was misled by or

relied on D practices.

Either alter-ego or unity of interest is advanced here.

Creditors chose to deal w/this corp:

-they have option to look at credit services.

-Creditors deal intentionally

-cts have less sympathy for creditors who choose to deal w/them.

This case suggests we can Pierce where there's:

a. injustice

b. inadequate capitalization

c. failure to observe corp formalities.

If a reverse pierce, then Marchees's other corps would be liable for the

$87,000 J. Only corp assets become avail.

If a pierce, then Marchees would be personally liable.

Enterprise Liability Entity: holds all persons' entities liable as a

single entity.

Ct Reversed Summ J in favor of D & remanded it back to trial ct for

further proceedings.

"Alter-Ego" corp: reflects unity of interest, no sep ownership;

injustice to allow sep existence.

VanDorn Rule: (Disjunctive part 2 test)

1. Unity of interest

2. Fraud or Promotion of injustice

To disregard Sep. Interests:

1. failure to maintain adequate corp records

2. commingling of funds/assets

3. undercapitalization

4. one corp treating the assets of another as its own.

Ct. says it passes the first part of the VanDorn Rule/Test, but must

prove separate identities would promote injustice.

Intentional Fraud would likely be req'd; too difficult to be proven on a

Summ J motion b/c the contention is that there is no issues of fact.

-must deal w/issue of scienter. (knowledge; intentional misstatement

of material fact; or material misstatement make recklessly.)

"Promote Injustice": an affirmative showing of fraud, but how much less?

Permitting the appellants to hide behind the shield of limited liability

would clearly serve as an injustice against appellee b/c it would

impermissibly deny appellee satisfaction.

-Some element of unfairness, something akin to fraud/deception or the

existence of a compelling public interest must be present in order to

disregard the corporate fiction.

[Applies the law of Ill, law varies from state to state. Cal, for

example, seems less clear.]

Kinney Shoe Corp v. Polan:

Polan had not made any investments in either Polan Ind/Industrial.

Polan possessed a lg amt of financial sophistication. His corporations

did not.

-B/C of sophistication was trying to shield & preclude financial

liability thru the corps.

Piercing is an equitable remedy b/c it seeks to get at personal assets

though the person didn't necc negotiate the transactions that are at

issue for breach.

The P has the burden of proof in seeking to pierce the corp. veil.

-pty seeking the equitable remedy.

2 prong Test:

1. Unity of interest such that the separate personalities of the corp &

the indiv shareholder no longer exist.

2. Would an equitable result occur if the acts are treated as those of

the corp alone.

Potential 3rd Prong:

3. When it would be reas for pty entering K w/the corp to conduct an

investigation of the credit prior to entering the K, such pty will be

charged w/the knowledge that a reas credit investigation would disclose.

If such investigation would disclose the corp is grossly

undercapitalized, the pty will be deemed to have assumed the risk of

gross undercapitalization & will not be permitted to pierce the

corporate veil.

-Not well accepted in most jurisdictions

***Hutch doesn't like the decision of this ct b/c it didn't address the

issue of fraud/injustice.

-doesn't think you should only show 1 prong of the VanDorn Test.

Could have owner of bus. personally guarantee the loan/debt.

Polan could have avoided personal liability by adhering to formalities

of corporations or to place a statement in the lease declaring that he

would not be held personally liable under any circumstances.

Frigidaire sales Corp v. Union Properties, Inc.:

In general, partners are generally liable, but limited partners aren't.

In general, shareholders aren't generally liable beyond their pers.

investments, unless there is piercing.

In general, corp officers aren't personally liable for their actions on

behalf of the corp.

Case in which limited partners, Commercial Investors, and gen partner,

Union, is a corp.

Union Prop is gen partner in Commercial, but is also its own corp.

Limited partners are also officers, directors, & shareholders in the

corp, Union.

2 Limited partners of Commercial are Mannon & Baxter. They're also the

officers, directors, & shareholders in Union.

-No persons are individually liable.

-Primary motivating factors is for tax purposes. Possible as a

limited partner to turn in $10 & then write of funds borrowed by the

partnership, thereby writing off all the $ you put in plus the amts

borrowed by the partnership.

-Became abusive tax shelters in the 80's & 90's.

A breach of K suit by Frigidaire, originally contracted w/Commercial.

Mannon controlled Union Properties, which controls Commercial which is a

partnership. If they manage the limited partnership w/in their indiv.

capacity, then they can become liable as general partners.

Ct held that limited partners don't incur gen. liab for the limited

partnership's obligations simply b/c they're officers, directors, or

shareholders of the corporate gen. partner.

If they are agents acting wrongfully, then their Principal, Union, is

liable as a corp, which thereby shields them from personal liability.

Shareholder Derivative Actions:

A corporation is a legal person. Derivative suit is a suit brought

about by a shareholder on behalf of the corporation. i.e. By a

shareholder to convict the gen manager of fraud, etc.

-Issue is usually direct or derivative c/a

Direct: direct loss to the shareholder. i.e. Board of dir. reconfigures

shareholders rts at detriment of one type & preferred benefit to others.

The 1st type has a direct loss.

Derivative: alleges loss to shareholder by virtue of a loss suffered by

the corp.

Cohen v. Beneficial Industrial Loan Corp.:

P demanded the corp institute proceedings for its recovery, but the

indiv D's prevented it b/c they held most of the shares.

-Sometimes they turn into "strike suits" in which the shareholder only

sues to harass the corp, like a strike

Cohen was held to post bond for this suit b/c of the state statute which

demanded it.

***Really a civ. pro. & Constitutionality issue, not a Bus. Org. case.

Merger combines 2/more companies into one, generally a consensual

agreement.

Holding Company: a company which buys & sells other companies for

profits. In many cases, is a non-operational company which holds stock

in operating companies. Usually receives income, in form of dividends,

from operating company, & invests in another unrelated company that

isn't under the control of the same regulations.

Parent Company: has subsidiaries, entirely/partially controlled by the

parent company.

-Lg firms usually have a lg number of subsidiaries.

Eisenberg v. Flying Tiger Line, Inc.:

P claims that there was a dilution of his voting rts as a result of the

formation & replacement by new organizations/entities to which his

share was transferred.

When derivative action is settled b/f judgment the attny probably wins.

Cts generally must approve settlements.

An indiv. shareholder cannot usually recover in a derivative action.

The Requirement of Demand on the Directors:

Heineman v. Datapoint Corp:

P alleged corp waste & breach of fiduciary duty, which was dismissed by

the lower ct.

-ct refused to allow P to amend his complaint.

The corp & the "Edelman Group" distributed funds, etc, to other corps

owned &/or having sub. connections to & an interest in the fin. well-

being of the Directors/etc.

-8 Directors, including Edelman were targets of the suit.

Is Claim Futile?

1. Whether the directors are disinterested & indep and

2. the challenged transaction was otherwise the product of a valid

exercise of business judgment.

Business Judgment Rule: ct is disabled/unable to effectively evaluate

business decisions, so great deference given to directors elected by

shareholders to run & manage the business/corp.

-suggests directors have power to control/discretion to make decisions

re: suits by shareholders. If in good faith & obliged w/fiduciary duty,

then the Ct. will show deference to their decisions.

Showing Deference: adherence w/duty of loayalty & care. Also

disinterested board.

Issue: does a boards decision to disallow/preclude a derivative suit

controlling upon the court?

-Yes, if it meets the standard for showing deference.

Ct. determined that the P should be allowed to amend his complaint b/c

if the facts as alleged were true, then he may have a prima facie case.

A shareholder derivative suit: is a uniquely equitable remedy in which a

shareholder asserts on behalf of a corp a claim belonging not to the

shareholder, but to the corporation.

Directors aren't necc disinterested w/re to the 1st 2 claims.

Purpose of a pre-complaint demand: to protect the director's

prerogative to take over the litigation or to oppose it.

Derivitive suits (v. Direct): on behalf of all of the shareholders.

Class action by all shareholders.

-Bus. J Rule: cts inclined to exercise deference re: Board of Dir.

decision assuming disinterestedness & carefulness.

-Aronson: Stand for pleading futility on demand to Board of Directors.

Whether, under the particular facts alleged, 1) a reasonable doubt is

creatd that the directors are disinterested & independent and 2)the

challenged transaction was otherwise the product of a valid exercise of

business judgment.

-Dinstinction b/t Fed Action & State Action & what state rule is &

does it control Fed. Action.

The Role of Special Committees:

Auerbach v. Bennett:

Questions whether there were funds distributed as kickbacks & bribes by

the Board, so an audit was conducted.

-evidence existed that the payments were made & totalling 11 million.

Purpose of special litigation committee is to determine whether the corp

should go ahead w/litigation(s).

Application of the business judgment rule is controlling in this case.

-particularly to the decision of a specially appointed committee of

disinterested directors acting on behalf of the board to terminate a

shareholders' derivative action.

Determine activity complained of (examine) & then examine what the

committee determined & see if it was in good faith & done w/care &

loyalty.

Business J. Rule: Board of Directors oversees & is in charge of the

primary competence of the entities & if it comes into

question/controversy/subject of litigation, then cts will defer to the

BJR if it is shown that the directors acted w/ loyalty & care.

For Bus J Rule to apply must show the committee & board were

disinterested & loyal & acted w/care.

-sham investigations aren't alright w/the cts.

-look at investigatory procedures used by the committee.

-look at substance of decision reached by committee

-look at motives of committee opting for dismissal

Zapata Corp v. Maldonado:

P alleges 10 officers & directors breached their duties.

P did not demand that the corp bring action b/c all of the D's were

members of the board, so Futility of Demand Rule applies.

Issue: When, if at all, should an authorized board comittee be permitted

to cause litigation properly initiated by a derivative stockholder in

his own right, to be dismissed?

1. Ct shold inquire into the independence & good faith of the committee

& allow limited discovery. Corp bears the burden of proving indep, good

faith, & a reas. investigation.

2. Ct should det, by its own business judgment, whether the motion

should be granted.

1) If demand-req'd case, decision of committee not to sue will be

protected by the business judgment rule.

2) When P doesn't make demand on the board, then demand is likely

excused b/c no indep exists re: board's decision.

***If demand on board isn't excused, then implies that the board isn't

faced w/a conflict of interest.

***If demand is excused then might implicate lack of independence of the

board & may indicate a conflict of interest.

Where demand is req'd, ct can conclude in effect that there is no

conflict in interest & in such cases the ct should defer to the board's

decision.

Where demand is excused ct says there is a conflict of interest & the

Board isn't indep. Thus under these circ, one can argue for the

greater judicial review of the committee's decision.

Alford v. Shaw:

Rule #1 relied on in trial ct.

Correct rule to be deployed is a modified Zapata Rule.

-unmodified is a strict scrutiny by the cts.

Precluded judicial review on merits & looked into the good faith of the

investigation & reports.

-concerned w/symbiosis b/t directors which precludes independence.

Issue: whether deference by the cts would abdicate the judicial duty to

consider the interest of shareholders imposed by the statute.

Demand-Excused case. Must a ct defer to recommendations by the special

litigation committee?

On Remand ct must allow P to present certain things.

Arises in a manner different from other cases.

Ct. app rev'd b/c corp directors may not confer to committee the power

to bind the corporation.

What is the modification of Zapata?

-preclude those accused of wrongdoing from decision of conferring power

to bind corp to committee (special litigation.)

Par-Value: stated value of shares at the time of incorporation.

The Role and Purposes of Corporations:

A.P. Smith MFG. Co. v. Barlow:

Corp. made contributions (charitable) to a local university.

Generally allowed.

Dodge v. Ford Motor Co.:

Gen Rule: cts will show deference to board decisions.

P's are the Dodge Bro's.

Issue: Whether a dominant shareholder can w/hold dividends to re-invest

in the co.

Whether the ct can interfere w/his decision?

Dodge wins on the dividend issue. Ford wins on the issue of

construction issue.

Shilensky v. Wrigley:

P, minority shareholder, seeks to force D corp to install lights in the

stadium. Also, P claims the directors for negligence & mismanagement.

Must apply the Business Judgment Rule Doctrine.

Problem 1:

1. She might prevail under Dodge case. Bill may be able to prevail if

he can prove that he had other reasons for making the decision that he

did.

***BJR: grants to directors a great deal of control & power, but only if

there is a lack of neg, duty of care, & actions were taken in good

faith.

The Duties of Officers, Directors, and Other Insiders; The Obligations

of Control: Duty of Care:

Kamin v. American Express Company:

A stockholder derivative action against the indiv directors of the Corp.

P seeking a declaration of dividend in kind as a ast of corp assets,

directing D's not to proceed w/distribution, or in alternative, for

monetary damages.

Dividend: payout (return).

-common shareholders: (voting rts)

-preferred shareholders: stated dividend; will be paid b/f common

shareholders are paid.

-cumulutive shareholders: adds up & is paid b/f any common

shareholders will be paid dividends.

Corp bought company for 30mil & it dropped to 4mil, so a 26mil loss.

-better to sell & recognize as a loss & recognize capital gains. Diff

b/t selling it & buying it.

-capital gains are codified in the IRC. Capital gains are

distinguishable from other types of income.

P's allege that b/c such a sale resulted in tax to co that the co is now

worse off.

-If this approach is adopted, would sophisiticated investors recognize

the consequences of the investments.

Appropriate ground for relief is determined by looking at Leslie v.

Lorillard & Liebman v. auto Strop. Co...

Ordinary Negligence doesn't give rise to an action against the

directors.

A conflict of interest b/t decision taken & the true interests of the

shareholders, so the Ct.s won't usually adhere to the BJR.

Joy v. North:

P sued via a derivative action against 23 "outside" directors & seven

other senior officers as "inside" defendents.

The case primarily concerns "outsiders".

A special litigation committee was appointed, composed of 2 directors

who became members of the board after the events complained of & who

were not defendants. The committee recommended that the suit be

discontinued as to the outside defendants & that the settlements be

sought as to the inside defendants.

Reason to uphold BJR:

1. Shareholders voluntarily undertake the risk of bad business judgment.

2. After the fact litigation is likely an imperfect device to evaluate

corp business decisions. business imperatives often call for a quick

ecision on less than perfect info. Must encounter risks and confron

uncertainty for a reasoned decision made may seema wild hunch view in

retrospect.

3. B/C potential profit corresponds to potential risk, the interest of

shareholds may lie in that the law not create incentives for overly

cautious corp decisions.

If a low risk taker, then perhaps should diversify risks by investing in

some high risk, high yield businesses to ensure a yield & growth in your

investments.

-If invest in low-risk low-yield co's, then you may find yourself not

making advances/growing.

***EXAM: Whatever its merit, however, the BJR extends only as far as

the reasons which justify its existence. It doesn't apply in cases in

which the corp decision lacks a bus. purp, is tainted by a conflict of

interest, is so egregious as to amt to a no-win decision, or results

from an obvious and prolonged failure to exercise oversight or

supervision.

Ct. concluded that the probability of a substantial net return to the

corp is high. They rejected the recommendation of the special

litigation committee. The grant of summ J is reversed, the protective

order is vacated, and the case is remanded.

In Kamin, a board decision based on an investigation, but in this board,

the members neglected their duty to investigate. Failure to exercise J

re: loans.

Francis v. United Jersey Bank:

Reinsurance: the process by which an insurance co that has agree to

insure a risk (the ceding co) asigns all or a portion of that risk to

another co (the reinsurer), along w/a share of the premium. The broker

acts as intermediary. It receives funds from ceding companies and is

obligated to pay these funds over to the reinsurers.

Sons in corp borrowed shareholder loans which caused the co to go into

bankruptcy. Mother is held liable b/c she was the director & failed to

uphold her duties.

Directors aren't generally insurers of the companies for which they are

directors.

Directors of financial institutions are generally held to a higher

standard of care.

As a general rule, a director should acquire at least a rudimentary

understanding of the business of the corp & be familiar w/the

fundamentals.

When the corp is insolvent, holders of residual interest is the

creditors. Directors hold a fiduciary obligation to the creditors.

Directors general obligation makes it incumbent upon directors to

discharge their duties in good faith & w/that degree of diligence, care,

and skill which ordinarily prudent men would exercise under similar

circumstances in like posotions.

*** General Standards for Directors.

-Owe a fiduciary duty. Compare the $5,000 w/the risk/chance being

taken. Also must consider the shareholders. Use the reas. prudent

person in like position standard.

-By showing that the decision was carefully considered & made

w/awareness of all the potential consequences, this MAY immunize the

directors from liability.

Decentralized: risky decisions made by lower mgt., lot risk, can be very

effective.

Centralized: forcing decisions down from hierarchy. Bad decisions

effect a lot.

Graham v. Allis-Chalmers Manufacturing Company:

Anti-Trust laws were to prevent companies from monopolizing particular

industries/enterprises.

Derivative action on behalf of Allis-Chalmers against its directors &

four non-director employees.

Complaint alleges actual knowledge/kowledge of facts which should have

put themon notice of such conduct, on the part of direcotr defendants of

the anti-trust conduct that the indictments were based on.

Deploy BJR w/strict scrutiny in situations such as these.

***Rules are changing. Today corps encounter greater risk of larger

losses, accordingly, some cts look to directors as fiduciaries & require

significant monitoring from directors to ensure corp employees comply

w/boards & w/stat policies.

Duty of Loyalty; Directors & Managers:

Bayer v. Beran [Conflict of Interest]:

Product Differentiation: tyring to deceive the consumer into believing

your product possesses superior qualities.

Public corp employs spouse of director, paid for by the

shareholder...CONFLICT OF INTEREST, DUTY OF LOYALTY, SO CT WILL OVERLOOK

BUSINESS JUDGMENT RULE & CORP. HAS BURDEN OF PROVING IT WAS DONE IN BEST

INTEREST OF THE CORP.

***Ask, "how did the directors fulfill their duties/perform their

duties.?"

Structural Bias: possible control by one director over the other

directors, so decisions aren't truly independent & infects the entire

board.

***W/A normal case, the burden of proof is on those who challenge the

transactions, but here there is a conflict of int, so the burden shifts

to the D directors to prove that the transactions were fair.

Lewis v. S.L. & E., Inc.,: [Conflict of Interest]:

LGT, a tire dealer and SLE owns land which it leases to LGT.

Leon transferred SLE shares to 6 kids (15 shares each), 90 shares in

all.

Those who had no LGT stocks were to sell SLE shares to LGT at book

value.

Book Value: an amt on the books of the fir, orig cost of assets, less

depreciation (an allowance for decline in value of an asset by virtue of

the passage of time & wear and tear), plus profits that have not been

distributed to the partners.

Derivative suit claiming that D directors had wasted the assets of SLE

by "grossly undercharging" LGT for the latter's occupancy and use of the

property.

***Members of the Board are given extremely wide & vast latitude in

reaching decisions. BJR would likely preclude consid by a ct of most

decisions by a board of directors.

***CL w/re trans in which Directors had an interest was voidable unless

the proponents of the trans could show that it was fair & reasonable.

***Not all of the Directors of SLE had a conflict of interest.

Structural bias is the reason for not upholding the BJR.

***Ratification is one way of insuring retention of the BJR.

-Ratification: full disclosure coupled w/approval of a majority of

disinterested directors (1st instance) and disinterested shareholders

(2nd instance).

Corporate Opportunities (Doctrine)

Energy Resources Corp., Inc. v. Porter:

Porter should have disclosed his intention of forming a corp & the

reasons that ERCO didn't get the proposal.

Porter employs the Refusal to Deal Defense.

W/O full discloseure it is too difficult to verify the unwillingness to

deal and too easy for the executive to induce the unwillingness.

-b/f a person invokes refusal to deal as a reason for diverting a corp

opportunity he must unambifuously disclose that refusal to the corp to

which he owes a duty, together w/a fair statement of the reasons for

that refusal.

Lack of Financial Capacity Defense: director pursues opportunity b/c

corp is allegedly uncapable of pursuing it themselves regarding their

financial position.

-creates incentive to sabatoge efforts of corp to pursue endeavor.

Ratification:

Fliegler v. Lawrence [Very Important Case; Case is THE rule]

1. Full Disclosure of Material Facts to board or committee & board or

committee in good faith authorizes the K/Trans. NEED MAJORITY APPROVAL

2. Full Disclosure of Material Facts to shareholders entitled to vote.

Approved by shareholders in good faith by vote. DON'T NEED A MAJORITY

OF SHAREHOLDER APPROVAL.

D's must prove that the transaction was fair.

If a shareholder vote, must be disinterested shareholder majority vote.

If not a disinterested shareholder majority, must look to sec.3. [This

Case].

-re: ratification

Dominant Shareholders:

Sinclair Oil Corp. v. Levien:

Shareholder & Directors approaches tend to be different.

-Shareholder wants to maximize return on investment.

-Director needs to manage firm to benefit all the shareholders.

Sinclair owns 95% of Siven Corp.

3 Transactions in issues:

1. Dividends

2. K b/t Sinclair & International (Corp Opportunity)

3. Breach K issue.

Self-dealing: when the parent, by virtue of its domination of the

subsidiary, causes the subsidiary to act in such a way that the parent

receives something from subsidiary to the exclusion of, and detriment

to, the minority stockholders of the subsidiary.

***Despite director & shareholder differences, some fiduciary duties are

imposed on some shareholders by some courts.

1. On majority shareholders & some minority shareholders who can

control the board of directors of a firm.

2. Some corp actions require a direct shareholder vote. Where

controlling shareholder exercises that vote in a manner ct considers

unfair, the ct. may hold that the shareholder violated fiduciary duty to

other shareholders.

Ct. held that Sinclair prevails on corp opportunity claim & dividend

claim. Levien prevails on the breach K claim.

Sinclair must meet the Intrinsic Fairness Test:

-2 Elements:

1. High degree of fairness

2. Burden shifting: burden shifts to Corp/Dominant Shareholder, must

prove, subject to strict judicial scrutiny, that the transaction was

objectively fair.

Parent owes a fiduciary duty to subsidiary when there are parent-

subsidiary dealings.

-Intrinsic Fairness standard will be applied only when the fiduciary

duty is accompanied by self-dealing.

1. Fiduciary Duty

2. Accompanied by self-dealing.

ie. Parent interests on both sides of the transaction.

Breach K claim: held that there was self-dealing.

-K called for payment on receipt (Int'l to Sinven), but payments

lagged 30 days behind. Also K called for min. purchases, breached.

BJR: appropriate for determining the dividend claim & the corp

opportunity claim.

Quest 2:

q: Was the shareholder duty of loyalty analysis necc to decide Sinclair.

How might one have resolved the case using only the law regarding the

duty of loyalty of directors?

-Sinclair is the principal & Directors are the agents.

-Sinclair Directors elected by Sinclair & were employees of Sinclair.

(Directors of Sinven) Sinven's directors were Sinclair's agents.

-Sinclair's liability would be derivitive.

Federal Law:

Santa Fe Industries, Inc. v. Green:

***Outside banking, ins., airline, & broadcasting industries, most are

not subject to Federal Regulations. They will if they seek to enter

capital mkts & public capital interests.

1933 & 34 securities acts & states securities acts.

-193: corp must file registration w/SEC & declared effective b/f can

offer interests on public mkt.

-registration req'ts subject to exceptions:

1. Private Placement: exemption for an offering made avail only to a

limited group of sophisticated investors.

-If 500 shareholders and min. assets, become reporting companies,

subject to continuing disclosure, 1934 Act. Periodic forms filed on

annual & quarterly basis.

-Must issue proxy statements.

***10b-: inside trading, duty to disclose, etc.

-Remedy (also 14e-3, 14a-9)

-10b-: allows allegedly defrauded to sue in Fed. Ct. if imp material

disclosure has not been made w/re: sale of a security.

Issue: Whether a federal remedy is avail for a state regulation/law

violation? Can we transmute alleged state law violation into a Fed.

violation? [NO]

Cash Out Merger/Short-Form Merger: Corp that owns 'X'% stock, then they

can force minority shareholders to sell out to majority owner.

State law remedy avail is appraisal, whereby ct seeks to determine true

fair mkt value of your shares.

10(b): unlawful for any person to use/employ manipulative or deceptive

device or contrivance in contravention of SEC rules, prohibits, in

addition to nondisclosure and misrep, any artifice to defraud, or any

act which operates or would operate as a fraud or deceit.

Wash Sale: artifice designed to take money from one group to benefit

another person, group, etc.

Ernst & Ernst held that in deciding whether a complaint states a c/a for

fraud under 10b-5 you must turn first to the lang of the stat as a

starting point in every case involving construction of a stat is the

lang. itself.

Inadequate comp isn't fraud if all material facts are disclosed.

1. May invalidate short-form mergers, b/c disgruntled shareholders claim

fraud & 10b-5 claim.

2. Prox cause may still be missing, so no neg. action. Causation

element may still be lacking. Possible argument by shareholder that

misstatement was material, & they would have otherwise sued to enjoin

the merger. Remedy is avail if misleading, appraisal remedy.

Inside Information: (inside trading)

Efficiency: liquidity w/all material information disclosed.

Liquidity: ability to sell quickly & get a good price.

ie. Assume given $5millionG house, & you have no $ to buy anything.

You wish to sell int in house immediately. Price you would get would be

less than 5mil.

-mkts best estimate for future mkt prices, etc.

-1. Sell Promptly

-2. Prices related to actual mkt value. (rationally related to true

value)

-3. Mkt prices adduced & related to public. Reflect earnings

prospects.

***Primary Mkt Securities: initial mkt in which securities are sold.

***Secondary Mkt: when stocks are resold.

***16(b): short swing profits, precludes officer, director, or 10%

holder from buying/selling stocks in 6mo period for a profit. [FED.

REGULATION]

-10b-5 [FED REGULATION]

***May be state law rules which govern inside trading.

Goodwin v. Agassiz:

2 D's MacNaughton, dir & gen mgr company & Agassiz, President &

director corp. Bought 700 shares of stock in Cliff Mining Co., thru the

Boston Mkt Exch.

P claims he sold the stock & D's purchased w/o disclosing to him

knowledge of geoligist's theory.

Held: D's owed duty to corp, not the shareholder, D's didn't know

shareholder, not a fact-to-face trans, info D's had was highly

speculative, exchange was on the open mkt.

***Some cts/cases suggest Special Circumstances Test, an

officer/director may owe a duty to its shareholder.

Securities and Exchange Commission v. Texas Gulf Sulphur Co.:

High Execs of corp found mineral ore deposits in prelim exploratory

drilling. Issued a release to public indicating prospects weren't necc

bright.

Calls: when customer wants to predict where stock will be in future, so

if it is at the price

you'd hoped, then you buy OPTION TO PURCHASE AT A CERTAIN PRICE.

-Adv: options.

Price of stocks went from 173/8 to 581/4 during period of non-disclosure

to disclosure.

***Categorize c/a under SEC rules 3 ways:

1. SEC can itself bring an action (civil action)

2. SEC can refer to judicial sys for crim prosecution

3. S.Ct. narrowly implies private c/a

-This case is an SEC Civil Action

Ct held that they were in violation of 10b-5. Anyone in possession of

material inside info must either disclose it to the investing public, or

if he is disabled from disclosing it in order to protect a corp

confidence, or if he chooses not to do so, must abstain from trading in

or recommending the securities concerned while such inside info remains

undisclosed.

Rule of Materiality: is whether a reasonable man would attact importance

in determining his choice of actionin the trans in question. An Fact

which in reas & objective contemplation might affect the value of the

corps stock or securities. Facts whichafect the probable future fo co

and those which may affect the desire of investors to buy, sell, or hold

co's securities. ***Knowledge of results imp to a reas investor & might

have affected the price of the stock.

***1. Trade (inside) based on info/non-disclosed information

2. Materiality is no longer an element if you can show the

insiders traded based on the info that was w/held.

Insiders must wait until info has been successfully disseminated, by

being made public effectively.

-until info has circulated b/c once circulated, the value of the info

will be reflected.

Unlawful for person, directly/indirectly, interstate commerce/mails, or

facility of nat'l securities exch...To use/employ,

manipulative/deceptive device/contrivance in contravention of such rules

& regs as Commission may prescribe as necc/appropriate in public

interest/for the protection of investors.

Purp of 1934 Act: to promote free and open public securities mkts and to

protect the investing public from suffering inequities in trading,

including, specifically, inequities that follow from trading that has

been stimulated by the publication of false or misleading corp info

releases.

Research done by an indiv, not an insider, does NOT have to be disclosed

b/c such a rule would discourage people from doing their own research &

trading on the open mkt.

***Standard for press release, for liab, is negligence. An SEC

enforcement action, so suggested that standard should be lower than in

criminal or private cases.

-SEC action, appropriate standard should be negligence.

Problems:

1. A) George is not legally entitled to recover profit from Martha, only

a moral obligation to disclose on part of Martha.

B) Same result if brother

C) Possibly fraud in that case.

D) Req'd to disgorge secret profits based on an agency theory. Gen.

Agent v. Limited Agent.

-General: liable for secret profit.

-Limited: may escape liability.

2. Jaun is liable based on a fiduciary duty established thru the

partnership

3. In general, don't conclude shareholder's owe fiduciary duties to one

another. More than likely she owes no duty. Tippee liability derives

from Tippor (insider) fiduciary duty/liability.

4. Under 10b-5 he is liable. : Agassiz case would hold him liable if it

were a face to face transaction. Under State law good possibility that

he would be liable.

***Rule 10b-5 can give rise to a private cause of action: Texas Gulf

Sulphur, est 10b gae rise to a private c/a for damages. P must prove:

[P's Burden]:

1. Materiality of concealed or misstated fact

2. Reliance

3. Scienter, and

4. Causation.

SEC can seeka civil penalty up to 3 times the insider's profits.

Express c/a for damages to comtemporaneous traders against inside

traders & tippers. Amt that can be recovered is limited to amt of

insider's profit reduced by any amt disgorged in an SEC enforcement

action.

Derivative liability of employers for the actions of their employees,

the actions of employees of brokerage firms, but contrary to the GEN

RULE for vicarious tort liability not if the employer is able to prove

good faith and noninducement.

Chiarella v. US:

D, markup man, in printing company. Chiarella correctly identified

target & bought shares of stock through a broker. Tender offer was

announced, shares rose, sold shares at a profit..

SEC brought criminal charges for violating 10b-5 "insider information".

-Higher standard in an SEC criminal action.

S.Ct. found that he wasn't guilty, not an insider.

Rule: A corporate insider must abstain from trading in the shares of his

corp, unless first disclosed all material inside info known to him.

Duty to abstain arises from the relationship of trust b/t a corps

shareholder and its employees.

-Since no relationship of trust b/t Chiarella and the shareholders of

the corps whose shares he traded, he had no duty to "disclose/abstain."

Reasons not to allow Insider Trading:

1. Fiduciary duties insiders own shareholders

2. Level Playing Field Argument: ban trading where there's unequal

access to trading.

Precluding inside trading increases the value of the services proved by

3rd pty mkt investigators/brokers, so shareholders are possibly

disadvanted from such preclusions.

3rd pty mkt professionals should be precluded from mkt trading if we

truly believe in the Level Playing Field Argument b/c they're also on

unequal footing w/shareholders, etc.

-Problem w/concept of inside trading.

Dirks v. SEC:

Equity Funding of America, sold Life Insurance.

-Equity in your life, for benefit of your beneficiaries. Hoping firm

will pay off on your policy upon your death.

Dirks investigated alleged fraud w/in Equity Funding. Sr. Mgmt denied

fraud; employees corroborated the alleged fraud story.

Dirks contacted Blundell, Bureau Chief of Wall Stree Journal's Los

Angeles office, who refused to publish any story related to the alleged

fraud.

Dirks contacted his clients re: alleged fraud in the company, who later

sold their stocks ($16 million).

S.Ct. refused to hold Dirks criminally liable b/c Dirks was not an

insider. Dirks had no duty to abstain from use of the inside

information that he obtained. Absent a breach of duty to shareholders

by the insiders, there is no derivative breach by the tippee.

-Here, Secrist is the tipper & Dirks is the Tippee.

-Purpose of disclosure to Dirks by Secrist was to disclose the fraud.

Secrist didn't personally benefit from the disclosure.

-He was disclosing non-public information (Secrist) & if an employee,

then possibly in violation of fiduciay duty/obligation, but since here

the purpose was to disclose the fraud (an illegal act). If tipper

cannot be held liable, then neither can the tippee.

Common Law in some juris imposes on corp insiders, particularly

officers, directors, or controlling stockholder an affirmative duty of

discloseure when dealing in securities.

Outsiders may become fiduciaries of the shareholders, special

confidential relationship in the conduct of the business. Temporary

insiders.

Duty to Disclose: An insider will be liable under 10b-5 for inside

trading only where he fails to disclose material nonpublic information

before trading on it and thus makes secret profits. Also, only liable

if in breach of fiduciary duties owed by the insider.

Duty to Disclose if: (Chiarella)

1. Agent

2. Fiduciary

3. Officers of securities/relationship of trust in confidence.

Mere possession of nonpublic information doesn't give rise to a duty to

disclose or abstain; only a specific realtionship does that.

Where a tipper's disclosure is in violation of Cady Roberts Duty, then

that is improper.

-Must est whether tipper was liable or in breach of fiduciary

obligation, then tippee will likely be liable if knows or should know

there was a breach of tipper's duty.

Duty of Loyalty & Care. If breach duty of care, clearly have breached

fiduciary obligation to shareholders. Not necc a violation of 10b-5.

(Only a violation if dealing w/securities.)

Question 3:

3. Suppose Secrist had disclosed inside info (not involving fraud) to

Dirks b/c of a bribe from Dirks. Dirks then advised clients to sell

their Equity Funding stock. Dirks would have then violated 10b-5.

Would Dirks' clients have violated the rule?

-Depends on whether they knew/should have known that he rec'd info in

violation of a fiduciary duty.

***SEC disagrees w/S.Ct. decision in this case. SEC is a regulatory

organization. SEC following Chiarella, adopted 14e-: illegal for a

person who unlawfully obtains advance information concerning attender

to use that info in a securities transaction.

-SEC's definition of wrongdoer & wrongfullness may be broader than

that of the S.Ct.

-May be able to prevail in front of S.Ct., but you would have to make

great expenditures in order to get there.

Carpenter v. United States:

Concerned w/Winans here, a reporter of the Wall Street Journal, who took

info to be published in his column re: stocks. The info was givn to

indivs who worked for a brokerage firm.

Winans was found guilty of knowingly breaching a duty of confidentiality

by misapporpriating prepublication info regarding timing and contents of

the column. Breach of 10b, securities laws, mail & wire fraud, and

deceit.

-All convictions were aff'd.

2 Distinct theories for liability under 10b-:

1. Traditional Theory:

2. Misappropriation Theory:

Chiarella did not owe a fiduciary obligation to the shareholders of the

company. Under Chiarella wouldn't owe a fiduciary obligation to the

shareholders of the companies that he wrote about.

-Under 10b-5, Winans shouldn't be liable b/c no fiduciary duty to

shareholders.

10b-5 prohibits any artifice to defraud or anything which operates as a

fraud/deceit.

-Winans committed fraud upon the Journal b/c of a property rt & he

misappropriated the property/info.

Journal's policy was that the info was to be kept confidential by virtue

of their property interest in the information.

Winans had fraudulently misapporpriated property w/in meaning of the

mail and wire fraud stats.

Though misappropriation theory is accepted in 2nd circ, the S.Ct. has

not yet adopted the misappropriation theory.

Footnote 14: Outsiders may become fiduciaries of the shareholders, such

as an underwrite, accountant, lawyer, or consultant working for the

corp. They've entered into a special confidential relationship in the

conduct of the business of the enterprise and are given access to

information solely for corp purposes. For a duty to be imposed, the

corp must exprect the outsider to keep the disclosed nonpublic info

confidential, and the relationship at least must imply such a duty.

Disclosure and Fairness:

1934 Act: contains some disclosure provisions, requires some firms

w/outstanding stock to disclose information on an on-going basis.

Regulates transactions thought to be potentially unfair, deceptive, or

fraudulent. Rule 10b-5, 16(b). Limits tactics firms can use in tender

offers and regulats proxy fights.

1933 Act: requires firm disclose extensive information about itself at

itme initially sells its securities. Exempted Securities & Exempted

Transactions. Prohibits sale of securities, unless company issuing

securities "registered" w/SEC. Issuer must give the Commission about to

sell stock to the public for the first time, must file "registration

statement". Also requires sellers to give prospective buyers a

"prospectus", a radically abridged version of the registration

statement.

State "blue sky" laws: state regulations of securities, in addition to

federal regulations.

Reves v. Ernst & Young:

Issue: whether certain demand notes issued by Farmer's Cooperative of

Arkansas and Olkahoma are "securities" w/in the meaning of sec 3(a)(10)

of the SEC act of 1934. [Yes].

Demand notes initially issued by the Co-op. Designed to promote

interests of the members.

P's claim that D's failed to follow generally accepted accounting

principles in its audit, re: valuation of Co-Op's major assets.

Inflated assets & net worth, P's wouldn't have purchased demand notes

b/c the insolvency would have been apparent.

Sec 3(a)(10) of 1934 Act: Security means any note, stock, treasury

stock, bond, debenture, certificate of interest or participation in any

profit-sharing agreement, but shall not include currency or any note

draft, bill of exchange, or banker's acceptance which has a maturity at

the time of issuance not exceeding nine months, exclusive of days of

grace, or any renewal thereof the maturity of which is likewise limited.

Stock is, as a practical matter, always an investment if it has the

economic characteristics traditionally associated w/stock. Stock

should be treated as w/in the ambit of the acts.

***Ct adopts the Family resemblance test:

-permits an issuer to rebut the presumption that a note is a security

if it can show that the note in question bears a stron family

resemblance to an item on the judicially crafted list of exceptions, or

convinces the court to add a new instrument to the list.

***Not Securities: note delivered in consumer financing, note secured

by a mortgage on a home, short -term note secured by a lien on a small

business or some of its assets, note evidencing a "character" loan to a

bank customer, short-term notes secured by an assignment of accounts

receivable, or a note wimly formalizing an open-account debt incurred in

the ordinary course of business.

If the seller's purpose is to raise money for the general use of a

business enterprise or to finance substantial investments and the buyer

is interested primarily in the profit the note is expected to generate

the instrument is likely to be a security. If the note is exchanged to

facilitate the purchase and sale of a minor asset or a consumer good, to

correct for hte seller's cash-flow difficulties, or to advance some

other commercial or consumer purpose, the note is less sensibly

described as a 'security'.

Doran v. Petroleum Management Corp:

Doran filed suit seeking damages for breach of K, recission of the K

based on violations of the Securities Acts of 1933 and 34, and a J

declaring the D's liable for payment of the state judgment obtained by

Mid-Continent.

Doran was liable on a note to Mid-Continent, & he defaulted b/c

partnership got caught over-producing oil & gas. Wells were shut down

for 1 year, so no profits, Doran was making payment to Mid-Cont based on

profits rec'd from Partnership.

Limited partnership interest is a "security" as that term is defined by

the Securities Act of 1933.

***Footnote 57 1933 Securitites Act, sec 5.

D's used the interstate transportation or communication in connection

w/the sale or offer of sale, the P thus states a prima facie case for a

violation of the federal securities laws.

Ct focuses on whether the offeree's had access to suficient information

necc to evaluate the limited partnership interest.

Private Placement:

1. Number of offerees

2. Relationship of offerees to each other & the issuer

3. Number of units offered & size of the offering

4. Manner of the offering.

***The ultimate buyer of a security may not necc be the offeree.

Ct reverses b/c P should have change to show that offerees didn't

know/have opp to know about the investment...details about the

investment. Didn't have enough facts to make an important decision.

Securities Act 1933:

Exemptions:

1. Securities: A security which is part of an issue offered & sold only

to persons resident w/in a single State or Territiry, where the issuer

of such security is incorporated by and doing business w/in such

State/Territory. Intrastate Securities Exemption.

2. Transactions: coverage is limited to specific sales only. Under

trans exemption, you can have security exempt under trans A, but same

security won't be exempt under trans B.

***If you sell stock exclusively in state to intrastate residents &

proceeds are used primarily to fund develeopments outside state, then

you don't qualify for 3(a).

Exemptions 1933 Act:

1. Private placement by offering Dorin Case.

2. Transactions by other than dealer/offeror.

Private Placements:

-More than 5mil, no more than 35 buyers, must be sophisticated. Must

file notice of sales w/SEC.

-Regulation D. Don't apply to accredited investors. Bankers,

Investment institutions, brokers, & wealthy investors.

-4(2): can resell securities, only if find another exemption. Focus

on only 1 trans. Need add'l exemption if want to resell.

Regulation D: resaler can

State Blue-Sky Laws: stricter than SEC in some cases. Assesses validity

of issuance to see if it was a valid investment.

Escott v. BarChris Construction Corp.:

Debenture: debt instrument, not a bond. Negotiable long-term debt

instrument, not secured. May be publicly traded.

Bond: Term may vary, generally long-term, secured, debt instrument. Can

be publically traded. All long term debt instruments, secured. Likely

to be paid off first in a bankruptcy proceeding, by cashing in

collateral.

Security: collateral to back up the debt.

Convertible Subordinated debenture: Can be converted into stock (common)

or if preferable convertible, then convertible into preferred stock.

Common Stock: Residual interest in a firm.

Preferred Stock:

If Bankruptcy, then order of pay-offs are:

1. Bond

2. Unsubordinated Debenture

3. Convertible subordinated debenture

4. Preferred Stock

5. Common Stock.

***Certain securities are more speculative than others.

Civil Liability Provisions, Sec 11 of 1933 Act

-Ptys liable:

1. Those who sign registration statement

-Experts, undersigners, investment firms

2. Issuer, likely to have no defenses.

Registration Statement: Portions of Statement & Liability of Ptys

1. Expertised Section:

2. Non-Expertised Section:

Portion of Statement Liability of Ptys

Non-Expert Determined by 11(b)(3)(A)

expert Determined by 11(A)(4)

11(b)(3)(a)

Registration Statement

Expert non-expert Determined by 11(b)(3)(c)

expert Determined by 11(b)(3)(b)

Convertible Subordinated 15yr Debentures are in issue, Class Action by

those on their own behalf and on behalf of all other present & former

holders of such debentures.

Any & all of listed directors & signers can be held liable. Almost a

strict liability.

Failure to prove the Due Diligence Defense.

Elements of Prima Facie Case:

1. Materially false statements/omissions

2. Reliance

3. Causation & materiality of statement

Not all of alleged misstatements were materially false.

Earnings Statement: focuses on revenues & expenses w/in period of time.

Balance Sheet: Assets & liabilites, focused on a particular period of

time.

Asset: Company owns

Liability: Company owes.

***Assets - Liabilities = NET WORTH

***EARNINGS/NET INCOME/PROFITS = Sales Revenue - Cost of

production/Expenses.

Ct says the sales mistatements/omissions were not material.

Ct says balance sheet errors were materially false w/in Sec 11

Debentures were rated B, meaning they were speculative.

Due Diligence Defenses, Sec 11(a): if any part reg. Statement, become

effective, containing untrue statement of material fact/omitted to state

material fact req'd to be stated or necc to make statement not

misleading, any person acquiring security may sue:

1. Every person who signed the statement

2. Every person who was a director of the issuer

4. Every accountant, engineer, appraiser, of person who has authority to

statement made by him w/his consent, named as having prepared/certified

any part statement, re: statement in reg. Statement, purports to have

been prepared or certified.

5. Every underwriter re: such security.

Due Diligence defense is avail to all but the issuer.

-Issuer cannot invoke the Due Diligence Defense.

***See Sec 11 (a)(3)(A-C)***

Indemnification & Insurance

Sec 145 Delaware General Corp Law:

-Del Sec 145(a) & (b) differ b/c

(a): suits by 3rd ptys allows indemnification in certain circs for

"expenses...judgments, fines, and amts paid in settlement

(b) indemnification for suits "by or in the rt of the corp" (derivative

suits), allows indemnification only for expenses and, if the person

seeking indem has been found liable to the corp, only w/judicial

approval.

***Third-Pty action v. Derivative Action, need to distinguish.

Citadel Holding Corp v. Roven::

In general, 16(b) liability arises when a director buys/sells stock w/in

a 6mo period, & company will be disgorged/re-distributed back to the

company. (The profits from the sale).

Problems of Control, Proxy Fights:

Proxy fight: a proxy solicitation by a non-management group in

opposiction to solicitation of mgmt, in attempt to get shareholders to

vote against current mgmt group/directors.

Proxy Solicitation:

***Some companies who wish to entrench directors, do so by form of

staged elections. Only 1/3 are up for election at a particular time.

***Proxy fights subject to 1934 SEC Act & to state corp statutes.

In general shareholder meetings held 1Xyr to elect officers; special

meetings for merger/sales, etc; notice reqt's for meetings to

shareholders; quorum reqt's meaning # shareholders or reps should/need

to be present at the meetings.

Only shareholders of record, on particular record date, are req'd to

vote (allowed to vote.)

Some votes for directors results from cumulative voting.

-Cumulative voting: can add up all votes on behalf of one director, ie

Own 10 shares & 5 directors running...can use 50 votes for 1 director.

***Like tender offers, proxy fights are subject to regulations derived

from 1934 SEC act & State Corporate Statutes.

Strategic Use of Proxies:

Levin v. Metro-Goldwyn-Mayer, Inc (MGM):

P's own 1% outstanding shares.

Law allows MGRS to charge company for costs of informing shareholders.

(Fill in info from case here)

Problem:

You will probably lose, especially if incumbents claim attempt to inform

others & expenditures are not excessive/unreasonable.

What would happen under Fleiger Rule? Conflict of interest, get auth

from disinterested stockholders or ....?

Potential conflict of interest, burden lies on the D/Corp to prove no

fault.

Model Corporations Act:

1. Annual shareholders meetings (in/out state)

2. Failure to hold annual meeting...

7.02 Special Meetings:

1. Call of Directors

2. Articles corpt/bylaws

3. Corp sec, 1/more written demand for meetings.

7.0:

Bylaws fix/provide manner of record date 1/more record groups, demand

special meeting or demand action. Don't provided for all manners, not

more than 70 days b/f meeting of shareholders.

7.20a:

after fixing record date of meeting, file list of all shareholders

entitled to rt to notice of meeting w/address & number shares held by

each shareholder.

Burden on Corp re: stock ledger. Other than that, stockholder must

prove b/f stockholder can seek info.

Shareholder Voting Control:

Non-voting shares can be issued to investors, helps to retain control of

corp.

Stroh v. Blackhawk Holding Corp:

Class A stock, voting rts, & retaining eco benefits.

Class B stock, voting rts, but no eco return. Used to retain control.

-P's contend that by depriving Class B shares of "eco" incidents of

shares of stock, or of the proportionate interest in the corp assets,

the Class B shares don't constitute shares of stock.

-P's are class A shareholders, want to deprive B types from voting b/c

don't have rt to dividends.

Control rt is a property rt, indep of eco return.

Arrangements To Increase/Retain Control:

1. Allow class specific board membership, a specific class of voters

will have a rt to vote, based on ownership of a particular class of

stocks/shares.

2. Voting Trust: Trustor/Benefactor, Beneficiary, and indiv that manages

the trust/trustee to advantage the beneficiaries.

Grantors/Trustors/Benefactors.

-Trustee: retains the rt to vote the entire trust shares. Generally,

a formal agreement & usually has a specific duration. Person is usually

compensated for their services. Sometimes subject to statutory

regulation.

-Beneficiaries: the grantors & the beneficiaries of the trust appoint

a trustee & retain the benefits.

-Proxy: get voting rts from a person. No identifiable duration, only

appointed as an agent. Not a formal agreement/contract. Not generally

compensated for services provided in voting on behalf of the

beneficiary/trustee. Generally the proxy agent is revokable, unless

coupled w/some other arrangement. Generally w/large, publically traded

firms.

3. Pooling Arrangement: 2/more shareholder pool shares & agree to vote

their shares to vote for ptys that they agree upon. If, however, can't

agree, then appoint someone as a referee & then the referee decides how

the votes will go.

4. Irrevocable proxy coupled w/an interest: generally a proxy is

revokable. Generally, K ties to consideration w/K agreement.

Shareholder must have some other interest in the firm, ie. employment.

Conditioned on job retainment, loan arrangement, etc.

Sec 151(a) Del. Corp Law: provides that corporations may issue various

classes/seris of stock, "which classes/series may have such voting

powers, full/limited, or no voting powers...shall be stated & expressed

in the certificate of incorporations. Allows differences in voting

power b/t classes of stock, but not w/in a single class of stock.

Control in Closely Held Corporations:

Ringling Bros. Barnum & Bailey Combined Shows v. Ringling:

1,000 total shares. 315 shares by Edith Ringling; 315 by D Ringling-

Haley; & 370 by D John North.

-Ringling & Haley were in agreement to control the board jointly &

increase the # of board that they could elect.

-Each could elect 2 (4 total) & North 3 [w/out the agreement]

-Each could elect 2.5 (5 total) & North 3 [w/the agreement]

Cumulative Voting: number of shares owned (1000) & 7 directors. Total

of 7,000 total votes available.

Haley had 2,205 votes; Ringling had 2,205 votes; North had 2,590.

-If North wishes to elect 3 directors, then he could split the vote 3

ways & have 863 1/3 votes.

-Hailey & edith have 4,410 votes. If they wish to elect 5 directors,

then 882 votes could be used for each director.

-Is 882 more or less than 863 1/3? More b/c could prevent North from

electing 3 directors & North will only be able to elect 2 directors.

If Haley & Ringling maintian agreement, then they will achieve their

objective.

D's contend that this isn't a legally binding agreement b/c you can't

separate the voting from the management.

Held: (see Sinclair Case: generally shareholders don't owe a fiduciary

obligation to other shareholders b/c self-interested indivs seeking to

maximize returns on capital invested.) Shareholders can agree & this

type of agreement is enforceable. This is a vote pooling agreement.

Prior to agreement, what could have prevented this litigation?

-Could have included in K, that upon disagreement voting will be

postponed.

-Give the shares to the mediator/arbitrator as legal owner, as a

trustee, & pursuant to instructions to maximize votes (5 directors,

possibly), on behalf of the shareholders of those shares.

McQuade v. Stoneham:

Baseball Club. P is McQuade & D's are McGraw & Stoneham.

-Stoneham owned the majority of the stocks.

Agreement b/t ptys to use best endeavors to continue as directors &

officers, No salaried to be paid to officers/directors except as

provided in the agreement, No changes to harm minority shareholders, &

keep the directors in office.

-K is void b/c can't make shareholders vote in a certain way; &

McQuade could not legally hold that job/position b/c of his other job.

-Void b/c doesn't benefit shareholders. Directors can't give up their

discretion.

Rule: an agreement among stockholders sttempting to divest the directors

of the power to discharge an unfaithful employee of a corp is illegal as

against public policy.

-Stockholders may not, by agreement, control the directors in the

exercise of the J vested in them by virtue of their office to elect

officers & fix salaries. Motives may not be questioned so long as their

acts are legal. Bad faith/improper motives of the ptys doesn't change

the rule.

-Directors may not by agreements entered into as stockholders abrogate

their indep J.

Clark v. Dodge:

P's & D's owned 2 corps, medical/medicine producers. Entered into a K.

Agreement provided generally that Clark would continue in his positions,

receive 25% of net income, be faithful, disclose the formula, & upon his

death bequeath stock to wife & kids of Dodge.

Dodge breached b/c Where the directors ar the sole stockholder, no

objection to enforcing an agreement among them to vote for certain

people as officers. Stockholders may do as they choose w/corp concers,

assets, provided creditors' interests aren't affected b/c they are the

complete owners.

McQuade Rule was to protect minority sharholder intersts. Under this

cts approach, directors in genral manage the corp. Limiting discretion

of directors, there is some authority to limiting the discretion of

directors.

1. Shareholders unanimously agree to limit the discretion of the

Directors.

2. Shareholders who make such agreements owe same fiduciary duties

that the directors owe.

Question 1:

1. In McQuade, ct says it is a matter of public policy that stockholder

may not, by agreement among themselves, control the directors in the

exrcise of the J vested in them by virtue of theier office to elect

officers & fix salaries. What if any, are the goals/criteria of good

gov't that underlie that public policy?

-Shareholders in larger corps are genreally less well-informed.

Protect them w/directors w/fiduciary duties which are more clear &

stricter. Small firms, you as a shareholder will be at least semi-

actively involved.

3. If McQuade had been assured of representation on the board of

directors, how might he have been assured of continuation in his role as

treasurer of the corp?

-Develop a legal & enforceable agreement that meets the interests &

demands of your client.

5. Suggests directors can appoint officers, sometimes, under Delaware

Law.

Use of employment K's:

-Term yrs; Termination for cause; Illness/incapacity; Compensation;

Duties & Status; Consequences of Termination; Ptys.

-Sell agreements: if problems occur & rt to demand one buys the other

(either way) at a price set by a fact finder/appraiser.

If dealing w/voting trusts, then certificates of voting trusts are

issued to shareholders. Holders are beneficial owners, but not necc

beneficial owners of record. Corp would likely treat voting trustees as

shareholders for most purposes.

Galler v. Galler:

100% stock originally owned & then after the agreement only 95% was

owned.

-208share/220 = 95% OR 12/220 = 95%

shareholder isn't a pty to the agreement, not a unanimous consent

decision.

Essential Terms Agreement:

-4 Directors, By laws amnded, Shareholdrs cast votes for particulars,

wife gets rt to nominate director, Salary continuation agreement

(provision 10).

Close Corporation: is one in which the stock is held in a few hands, or

in a few families, & wherein it isn't at all, or only rarely, dealt in

by buying/selling. Shareholder agreements similar to that in question

here are often, as a practical consideration, quite necessary for the

protection of those financially interestedi nt eh close corp. While the

shareholder of a public-issue corp may readily sell his shares on the

open mkt should management fail to use, in his opinion, sound bus J, his

counterpart of the close corp often has a large total of his entire

capital invested int he business & has no ready mkt for his shares

should he desire to sell.

Agreement is not a voting trust, but rathre a pooling agreement.

If agreement in issue is a voting trust, then it needs to be of a

limited duration, the maximum allowed is 10yrs. [10yr limit is a

traditional rule/limit].

Concerned she might be at the mercy of a uncaring majority.

Ramos v. Estrada:

Whether there was a breach & when the breach occurred if there was a

breach?

Broadcast & Ventura merged to form Television, Inc.

Shareholder Agreement concerns Broadcast.

Ramos was elected president. Estrada defected by voting w/Ventura,

against the Broadcast & Merger Agreement.

Agreement provided that members of Broadcast were to vote among

themselves & then shareholders were to vote acc to the majority vote.

Estrada didn't not breach until Oct 15th, 88 by written repudiation.

-Agreement as written was a shareholder agreement, not an agreement to

limit the discretion by directors.

Her repudiation of Oct 15 results in breach. Agreement is a valid,

enforceable agreement, provided w/a buy out agreement. Forced to sell

shares at 8%.

Agreement has characteristics of a shareholder's voting agreement

expressly authorized by sec706 subdivision (a) for close corporations.

A agreement b/t 2 or more shareholder of a close corp, if in writing &

signed by the ptys, may provide that in exercising any voting rights the

shares held by them shall be voted as provided by the agreement, or as

the ptys may agree or as determined in accordance w/a procedure agreed

upon by them.

Calif. Practice Guide indicates that such "pooling" agreements are valid

not only for close corporations, but also "among any number of

shareholders of other corporations as well."

Consideration for the agreement is the limitations on transferability of

stocks w/in the company.

Abuse of Control:

Wilkes v. Springside Nursing Home, Inc:

What type of agreement would have solved some of problems in this case?

-a buy/sell agreement.

Freeze Out: when you invest in a firm & the firm no longer has funds.

1. Any other litigational alternative than suing for shareholder duty

breach by other shareholders?

-wrongful discharge

- shareholder derivative action based on fact that the other

shareholders were paying themselves an amt that is not adequate.

Corporate waste, recover excessive salaries to benefit all shareholders.

-Lawsuit b/c destructive dividends. Other shareholders entitled to

wages. ($5,000-6yr) Constructively a divident, discrimination against

Wilkes.

***If firm doesn't pay dividend, then excessive salaries? Possible

destructive dividend, then possible action for dicriminatory dividend

payment.

Ingle v. Glamore Motor Sales, Inc.:

Ingle should have had an employment agreement precluding termination w/o

cause.

Wilkes had no shareholder agreement, Ingle had a shareholder agreement.

Glamore should have requsted an employment agreement specifying at-will

employment w/termination w/o cause.

Shareholder agreement specified that if Ingle's employment was

terminated for any reason, then re-purchase agreement would go into

effect, whereby Glamore could re-purchase Ingle's stock.

Issue: whetehr P's status as an officer, director, substantial part

owner & active participant in the affairs & mgmt of Glamore Motor Sales,

a close corporation, gives him equitable rts & remedies which aren't

subject to the ordinary legal rules of master & servant?

Duty of care & loyalty is owed to minority shareholders by majority

shareholders. P argues it is a breach of fid. duties to terminate him

by vitue of being a shareholder of a close corporation.

-paid him 2,400 for each share, totaled $96,000 for 40 shares.

Gen Rule: minority shareholders in a closed corp are entitled to special

protection.

Sugarman v. Sugarman:

Sugarman breached his giduciary duties to the minority shareholders.

This is a closed corp.

Leonard Sugarman owned 61%shares

James & Marjorie owned 21.%each

John was employed & discharged

Minority shareholders alleged:

-excessive payment of salaries & bonuses

-freeze out

-Leonard breached his fiduciary duty

Freeze out evidence: Leonard offered to buy out Jon & Marjorie's stocks

at grossly undervalued prices.

Shareholders of a close corp owe shareholders a duty of utmost good

faith & loyalty.

Breach of fiduciary duty is the main complaint in this case.

Burdens:

1. Not sufficient for a minority shareholder to prove that the majority

shareholder has taken excessive comp or other payments from the corp.

2. Not sufficient to allege that the majority shareholder has offered to

buy the stock of a monority shareholder at an inadequate price.

3. Minority sharholdr must first establish that the maj shareholder

employed various dvices to ensure that the minority shareholder is

frozen out of any financial benefits from the corp thru such means as

the receipt of dividends/employent & that the offer to buy stock at a

low price is the "capstone of the maj. plan" to freese out the minority.

Quest 1:

1. Force Leonard to buy out P's at a fair price.

-At what price?

-Value/price should pay the PV of the discounted cash flow.

-Looking at the time value of future money.

-Reduce damages to some dollar amt.

***A buy/sell arrangement would have eliminated/solved most of the

problems/issues in this case. Need to anticipat & consider problems b/f

they arise.

Jordan v. Duff & Phelps, Inc.:

Jordan paid book value for the stocks he purchased.

-Book value is the price paid for the asset. The stated value on the

books of the firm.

-Upon resale to the firm, Jordan was supposed to get adjusted value.

Must sell shares back to the firm if your employment is terminated.

-He is resigning from the firm to create a distance b/t his wife & his

mother.

-He is leaving for reasons unrelated to his employment.

Whether failure to disclose potential merger was material to his

decision to go to Texas.

His continued employment to end of year was to end of fiscal year, so

firm was reasonable in allowing him to maximize the value of his shares.

He would have rec'd, if merger was completed, $452,000.

Jordan was motivated to leave b/c his mother & wife didn't get along.

Domestic concerns prevailed over financial concerns.

He agreed to resell stock to firm at book value.

Jordan's primary claim for relief is that they didn't fully discloses

the merger negotiations/discussions.

Merger wasn't consummated. Book value of stock may still be $23,000

(roughly), unless the merger negotiations increased the value of the

stock. Historical accounting cost will not change in light of a premium

offer.

Pursuant to agreement, if there was an acquisition, then he'd be

entitled to appreciation value/mkt value of the stocks.

If had acquired shares at FMV & sell at FMV, then different case.

Here, suggestion is that he's entitled to book value.

Initial complaint, sought damages. Amended complaint, sought recission.

If seeks recission, then can hold on to stock & seek increased value on

stock. K provides that upon termination of employment, he must resell

stock at book value.

Duty to disclose b/f trading, Rule 10(b)(5).

Abstain/Disclose Rule: limited rule. Predicate for recovery under

10(b)(5), must be an insider, or in 2nd circuit, then misappropriation

theory... Jordan was dealing w/an insider. C/A based on 10(b)(5), CL

fraud, & breach of fiduciary duty.

Materiality Standard: Close corps that purchase their own stock must

disclose to the sellers all information that meets the standard of

materiality.

-There is a substantial likelihood that, under all the circss, the

omitted fact would have assumed actual significance in the deliberations

of the reasonable shareholder & would ave been viewed by the reasonable

investor as having significantly altered the total mix of information

made avail.

Intentional Misrepresentation...CL fraud in sale of securities.

-Seller can't lie, may not have to disclose all relevant info,

however.

Duty in question is the fiduciary duty of corp law. Close corps

buying their own stock, like knowledgeable insiders of closely held

firms bying from outsiders, have a fiduciary duty to disclose material

facts.

-"Special Facts Doctrine" developed, based on the principle that

insiders in closely held firms may not buy stock from outsiders in

person-to-person transctions w/o informing them of new events that

substantially affect the value of the stock.

"Scienter" is required for Jordan to recover in this case.

Stock, FMV is significantly higher than the book value. Jordan was

harmed from failure to disclose.

Jordan gets to go back to trial ct to prove element of causation

Posner would say Jordan was entitled to "Experience" only.

Control, Duration, and Statutory Dissolution:

Buy out Agreement: minority shareholder arranges w/corporation itself.

Not all shareholders are farsighted, so they haven't negoticiated this

BOA. Corporation Dissolution is avail when shareholders don't have a

buy out agreement.

-Statutes may force majority to bargain w/frozen out minority

shareholders.

-Liquidation value of firm may be less than value of the firm.

-Advantage of liberal dissolution state...gives minority shareholders

options to sell shares above FMV b/c can threaten to shut down the

entire firm.

-Cts reluctant to force dissolution b/c can be used opportunistically

by minority shareholders.

Alaska Plastics, Inc. v. Coppock:

Divorce settlelment, Muir got 1/2 of her husband's shares, a 1/6th

interest.

Directors voted themselves annual director's fees. In addition to

director fee payments, they were also paid personal expenses & expenses

for their spouses.

Actual dividends weren't paid, but constructive dividends were paid.

Alaska Fairbanks plant burned down & was not insured. After fire,

Valley Plastics was the only asset. Alaska b/c a holding company for

Valley Plastics.

This Ct remanded to the superior ct for further proceedings. Then trial

ct entered J for $32,000 as the FMV. Sup.Ct. upheld the trial cts

findings of oppressive or fruadulent conduct sufficient to warrant a

remedy as drastic as involuntary dissolution of the corp or a forced

buy-out of Muir's shares.

-ct suggested trial ct reached wrong result b/c perhaps didn't apply

the right law.

No statutory provision requiring company to purchase a minority

shareholder's stocks.

Liquidation: dissolve first & the division of the assets is the

liquidation. (2nd)

Dissolution: the dissolution is the termination of the existence of the

company (1st)

Ct has equitable power to force a buy back, instead of forcing a

dissolution. Thereby, majority shareholders must purchase the minority

shareholder's shares at FMV.

P's burden: must establish on remant that the Acts were "illegal,

oppressive, or fraudulent", or aleternatively, constituted a wast or

misapplication of corp assets.

Donahue & Ahmanson, generally the rule is that if we can show unequal

treatment, then the controlled remedy is Equal Treatment

Muir could bring at least 4 actions:

1. may be a provision in articles of incorp or by-laws providing for

purchaseof shares by th corp, contingent upon the occurrence of some

event, such as death of shareholder or transfer of shares.

2. shareholder may petition ct for invol dissolution of the corp

3. significant change in corp structur, ie a merger, sharehoder may

demand a statutory rt of appraisal.

4. Finally, a purchase may be justified asa an equitable remedy upon a

finding of breach of giduciary duty b/t directors & shareholders & the

corp or other shareholders.

5. Liquidation

6. Derivitive Action

7. Pro-Rata share, looking at director's fees.

Abrams. v. Abrams-Rubaloff & Associates, Inc.:

Dissolutions stats vary from state to state.

Abrams & Rubaloff owned 50% of corp.

Abrams sought to dissove the corp

Rubloff &/OR corp initiated the appraisal process.

Any corp may elect voluntarily to wind up & dissolve by the vote of

shareholders holding shares representing 50% or more voting power. [Cal

Corp Code]

FMV is determined by 3 appraisers. Each pty elects an appraiser & those

appraisers elect the 3rd appraiser. FMV is determined on the basis of

the liquidation value taking into account the possibility, if any, of

sale of the entire business as a going concern.

-Appraisers are not only entitled, but are required, to consider the

maner in which the ptys to such a sale are most likely to maximize their

return.

If shareholders can't agree re: FMV, then the appraisal process will go

into effect.

2 Appraisers came up to FMV of shares being $355,000. The other value

given was $139,750.

$482,5000 was Abrams' share as a going concern value.

Potentially, customers could be taken w/them, so value of shares may be

less. Going concern usually has a non-competitive clause (max 5yrs).

***Statute can reduce need for a buy/sell agreement. Agreement doesn't

eliminate need for dissolution b/c dissolution may be precluded by even

the most liberal statutes.

Transfer of Control:

Payment of control premium & sale of corp offices.

-A control premium payment generally arises when a buyer purchases a

large lot of stock in a firm (%).

Frandsen v. Jensen-Sundquist Agency, Inc.:

Frandsen owned originally majority of the stock of the company.

-Sold 52% of stock in holding company to family & 8% to others. Sold

off a large faction of stock in the company.

Shareholder Agreement provided that no shares would be offered to

ousiders. Majority bloc agreed "that shold they at any time offer to

sell their stock they will first offer their stock to minority

shareholders who negoticiated for this K at the same price as may be

offered to maj bloc & will not sell their said stock to any other

person, firm, or organization w/o first offering said stock to minority

shareholders at the same price & upon the same terms. majority block

also agreed not to "sell any of their shares to anyone w/o at the same

time ofereing to purchase all the shares of minority shareholders at the

same price. If majority bloc offered to sell its shares it had to give

Frandsen a rt to buy the shares at the offer price.

-[Rt to refusal.]

Deal w/1st Wisconsin was primarily a merger. Conceptually, draw

distinction b/t merger & simple acquisition of shares.

-Merger: a combination of 2/more firms.

Distinction matters b/c minority shareholders have no protection under

agreement in case of a merger.

-shareholder agreement is unenforceable.

Majority shareholders did not offer to sell their stock. Provision did

protect from sale of a majority bloc of shares, but not to sale of the

company.

Sell: can mean many things. Theoretically, could embrace "merger".

Must define terms w/in agreement, w/an explicit statement in Agreement.

Rt of First Refusal should be interpreted narrowly.

D's prevail in this case.

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